Wednesday, December 17, 2008

In AY as "question mark," Observer breaks news that Ratner's renegotiating subsidy deals

In Atlantic Yards Becomes a Question Mark, the New York Observer's Eliot Brown tracks the decreasing confidence of developer Forest City Enterprises and its subsidiary Forest City Ratner in the Brooklyn project--and breaks a bunch of news about how the city and state might be helping with those pesky cash flow difficulties.

Brown reports:
According to multiple people familiar with discussions, his subsidiary company, Forest City Ratner, is attempting to cobble together extra money; trying to speed up tens of millions of dollars it is owed by public entities; delay tens of millions in payments it owes to both the public and private sectors; and tack on new subsidy programs for the housing piece of the project. Earlier this month, Bruce Ratner abruptly shut down preliminary construction efforts related to the NBA arena in an apparent attempt to preserve cash.

That latter observation shows that the claim that lawsuits have stalled the railyard work just doesn't wash. It's another example of the Observer providing the strongest mainstream reporting on Atlantic Yards.

IRR's not profit

I'm not sure that the Observer's correct in observing that the "project had an unusually low margin of return... as Mr. Ratner slathered on promises and concessions in an attempt to win political support."

The apparently low internal rate of return (IRR) is not profit. Two years ago, I asked affordable housing consultant David Smith for his analysis. He pointed out that IRR did not consider the fees to the sponsor. Forest City Ratner, the Times reported 7/1/07, would get a 5% fee on the project as a whole, even though the developer would put in only a fraction of the investment.

New situation

Brown cites several pressures on the development: losses from the Nets; increased financing costs; lowered housing prices; less valuable low-income tax credits; a fall in demand for office space; and construction costs that "have skyrocketed."

The latter two, I think, deserve an asterisk. The demand of AY office space was always overstated (though the economic downturn has certainly made it worse). And while construction costs rose significantly since the project was approved, they likely have dipped somewhat in recent months.

Renegotiating with public agencies

The big news, "according to multiple people familiar with discussions," concerns attempts to revise subsidies:

The developer is due to owe the M.T.A. $100 million when it closes on the three-block Vanderbilt rail yards, an act that is slated to happen after the eminent-domain litigation is completed. But financing is nearly impossible to find and Forest City is hardly swimming in cash. Thus, according to one person familiar with talks, the developer has asked the M.T.A. to restructure the payments so it does not pay the full $100 million upfront.

The developer is seeking the converse from the city, which owes Forest City a total of $100 million in direct payments to be spread out over time. About $40 million of this sum has already been paid to Forest City, and according to multiple people familiar with discussions, the city is considering speeding up the payments on the balance.

As for the housing component, much of which is for families with low or middle incomes, Forest City is in discussions to add on additional affordable-housing programs or incentives beyond what it outlined in 2006, bringing greater subsidy to the apartments.


While no official would comment on the record, it's all worth much more scrutiny.

Why should FCR not have to pay the MTA in timely fashion if that was part of the original deal (and the payment less than half the appraised value)? Will FCR even build a permanent new railyard or just leave the MTA with the interim, temporary yard?

Why should the cash-strapped city give FCR a special deal when so many programs are hurting?

And shouldn't there be transparency regarding the Atlantic Yards affordable housing? How would the subsidies compare to those for other projects?

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